Tuesday, September 29, 2015

In northeast China's Changchun City, farmers, suppliers and construction companies gather at the gates of Dacheng Biotech Group to collect on unpaid bills. Most go away empty-handed from the mostly-deserted headquarters of Asia's largest corn-processor which has been idle most of this year.

The company is listed on the Hong Kong stock exchange and is Asia's largest "deep-processor" of corn, yet it has accumulated 80 million yuan in unpaid IOUs to farmers who sold corn to the company.

The money owed to farmers is a miniscule part of Dacheng's arrears. Voice of China reports that a company official says Dacheng is behind on RMB 9.8 billion in bank loans and owes RMB 1.2 billion to suppliers. They claim to have struck a deal to pay off debts to farmers by the end of the year.

After a string of bad business decisions and with demand for its main product shrinking along with the Chinese hog herd, Dacheng Group's cash flow has dried up. China's big four state-owned banks have stopped feeding loans to the company, and it is near insolvency. It has essentially been shuttered for six months. In March 2015, the company sent a report to the Changchun government and to its main lender informing them that it was idling its production operations.

A report from China Business Journal explains how the company got into its predicament. Dacheng Group was founded in 1996 as a starch factory. Its main products are lysine, an amino acid used in animal feed, and liquid glucose. Both products are made from corn, northeastern China's leading agricultural product. The company normally would use up to 8 million metric tons of corn annually.

The company listed on the Hong Kong stock exchange in 2001. It hit the big time when Jilin Provincial leaders chose corn-based biochemicals as one of two pillar industries to develop the regional economy (vehicles for special uses were the other one). After that, free land, loans, and preferential tax rates came the company's way.

An unnamed industry participant told China Business Journal, "The government ordered banks to give Dacheng money, and a considerable part of the loans had no collateral."

In 2006, Jilin authorities issued a document conferring special status on two projects: the airport for Changchun (Jilin's provincial capital), and a giant corn industrial park near Changchun. The park's plan was to make chemical fibers and plastics out of corn. In 2009 they ordered Dacheng to relocate to the industry park with free land and other inducements. When the park was still unfinished and underutilized in 2012, another of its subsidiaries was ordered to move there too.

In 2010, another of Dacheng's subsidiaries was awarded "high-tech company" status, bringing another tax break.

The company's business reportedly began going downhill after its chairman died three years ago. Since then, the company has had three CEOs, none of whom could turn the company around. Observers say the company expanded too rapidly and was too eager to diversify into ventures at the request of the government. It failed to upgrade the quality of its products, neglecting to transition into higher-margin crystallized sugar. Dacheng admitted to having serious excess capacity for lysine production, and it expanded production of starch that was earning minimal profits.

According to China Business Journal, aggressive expansion ate up the company's cash, and it built up short-term liabilities to finance investments with long-term payoffs.

The way forward for Dacheng is unclear. It's rumored that the local government wants COFCO--the state-owned agribusiness conglomerate--to acquire Dacheng but banks reportedly oppose the move. The Changchun government has reportedly given the company some subsidies to keep it going.

CJ Group, an offshoot of the Korean Samsung conglomerate, is reportedly interested in acquiring Dacheng. CJ Group would become the world's leading lysine producer if it acquired Dacheng. The companies have had a partnership since 2006 and the CJ Group president reportedly traveled to Changchun to meet with the governor of Jilin. (CJ Group has its own problems--its CEO was arrested in Korea last year and his sister has taken over.) An unnamed industry person warned China Business Journal that a Korean takeover would mean that Chinese people lose pricing power for a critical feed additive, and "when we eat pork or chicken, it would not be at the same price as now."

A provincial investment group acquired a 49% interest in Dacheng during August and China Business Journal says it is reportedly negotiating with other Chinese companies to make a further move.

Dacheng's plight comes at a bad time for China's corn industry which is already suffering from a severe corn glut.

Sunday, September 20, 2015

Chinese authorities are intent on overhauling their bloated farm subsidy program after it spiraled out of control in its first decade. They urgently need to move on to a new generation of subsidies, but they have encountered unexpected problems in trial programs.

Economic Observer says there has been a lot of criticism of agricultural subsidies for their cost, ineffectiveness, and complexity. There are 50 major agricultural programs, and according to some estimates their annual cost is over 1 trillion yuan (nearly US$ 160 billion). There have been a number of motions and proposals to reform agricultural subsidies put forward at National Peoples Congress sessions during the last several years. At this year's session, the chairman of Wahaha Group called for a reform that would reduce the financial "albatross" and shift the program from a general entitlement for the rural population to one that benefits real farmers.

Officials have been experimenting with farm subsidy reforms. While the new programs look good on the drawing board, they underestimate the cleverness of farmers, local officials, and businesses to find loopholes.

Economic Observer learned that the experimental "target price" program for cotton met with many unexpected difficulties this year. Besides being extremely complicated and costly to implement, it gave cotton warehouses designated to buy cotton a kind of monopoly which enabled them to depress the price paid for the cotton. This raised the gap between the "market" price and the target, and thus expanded the subsidy payment. There were also reports of collusion between farmers and cotton dealers to maximize the subsidy payments.

One of the big criticisms of "grain" subsidies is that payments go to rural land-holders whether they plant grain or not. Many rent out their land to actual farmers who don't get any subsidies. This year, a new pilot program will lump three grain subsidies into a single payment, and it will take subsidies away from those who don't grow crops and instead give payments to new "appropriate scale" farmers who rent land from dozens of land-holders. However, Economic Observer learned that land-holders in Shanxi and Henan Province are raising the rents they charge to the "appropriate scale" farmer-tenants in order to recover their "lost" subsidies. Thus, the additional subsidies to "appropriate-scale" farmers may be eaten up by the higher rents they have to pay.

The subsidies are also hard to keep track of. With over 50 major agricultural programs, and the costs of each supported by budgets of multiple government departments at the central, provincial, and county levels, the accounting is a tangled mess and money often fails to arrive. A Chinese Academy of Social Sciences scholar revealed to Business Reference News that the initiative to consolidate three grain subsidies into a single payment is closely related to a major fiscal reform to simplify tangled government accounting that has received a lot of criticism for many years. He said that agricultural subsidies have been the biggest fiscal headache.

The National Development and Reform Commission's plan is to implement "target price" subsidies for corn, soybeans, cotton, rapeseed and sugar after successful experimentation, then introduce them for wheat and rice. However, cotton and soybean production both plummeted in the regions where the target price subsidies were trialed during 2014/15. The pilot program for consolidating grain subsidy payments is planned for national implementation in 2016--after just one year as a pilot program. This program could be disastrous if "appropriate scale" farmers have to pay higher rents while crop prices are declining.

Saturday, September 19, 2015

Chinese authorities lowered their floor price for corn for the first time since the program began as they battle bloated stockpiles and surging imports of corn-substitutes.

A September 18 document from China's Grain Administration announced a "temporary reserve" price for corn of 2000 yuan per metric ton for 2015/16. This is an 11-percent cut from the 2014/15 level and a return to the level set in 2011/12. This year's price floor is equivalent to $8 per bushel, more than twice as high as corn prices in the United States.

The beleaguered temporary reserve program will operate only in China's four northeastern provinces from November 1 to April 1 (about a month earlier than in previous years). This year, the program will set a single floor price for all four provinces instead of setting different levels for Heilongjiang, Jilin, and Liaoning/Inner Mongolia as had been done since the program was first launched in 2008. The discount/premium for different grades is 50 yuan/metric ton.

Reflecting the concern about moldy corn in the stockpile, the program requires that corn purchased must be properly dried and meet national standards for moisture and mold. It also includes vague language demanding that local governments finance purchase of substandard corn to fulfill their obligations under the "governors responsibility system" for food security.

Reflecting the lack of storage space, the program gives instructions for renting warehouses and it sets subsidies of 70 yuan/metric ton for construction of open-air or temporary storage. The document authorizes three state-owned companies (COFCO, Chinatex, and China Aerospace) to supplement Sinograin in purchasing corn. The purchasing cost (presumably subsidized) is set at 50 yuan per metric ton.

The cut in corn price was forced by mounting stockpiles as corn production rose, consumption tailed off, and high Chinese prices attracted imports of substitutes -- sorghum, barley, distillers grains, and cassava. The government purchased and stockpiled successively-larger volumes of corn over the past three years. Auctions of the corn attracted little interest because prices were too high.

The "temporary reserve" of corn has swollen to 158 mmt according to calculations by Chinese analysts who added up purchases and sales over the years. However, the total corn reserve is 200 mmt--nearly an entire year's supply and more than a year's consumption--according to a National Development and Reform Commission official's speech to a corn industry conference this week. The official described that total as "far beyond the reasonable level" and he said it shows clearly that supply exceeds demand. The NDRC official raised concerns that some production areas have so much corn that officials are unable to buy it, can't store it, can't sell it, and budgetary shortfalls threaten "trouble after a big harvest."

At the same meeting, the deputy director of the National Grain and Oils Information Center surmised that China has reached "a new plateau in which supply will exceed demand" and there will be downward pressure on prices for several years.

The 2000-yuan/mt price floor is slightly below current corn prices in the northeastern region. Prices there currently range from 2040 to 2140 yuan. Normally this region--the major surplus area--has the lowest prices for corn but prices are artificially high due to the stockpiling program that operates only in that region. Corn prices in parts of Henan, Hebei, Shandong, Shaanxi, and Anhui Provinces are around 1900 yuan, and 2000 yuan in southern Jiangsu. There may be further downward pressure on prices once the newly harvested corn comes on the market.

The cost of imported grains is still less than the 2000-yuan floor price. The cost of U.S. corn is estimated at 1658 yuan and distillers grains is 1639 yuan, including duties, taxes and unloading fees. Imported U.S. sorghum is estimated at 1825 yuan.

The temporary reserve program has disrupted corn marketing in China by elevating prices in the main surplus region. There is incentive to ship corn from low-price areas into the northeast to sell to the reserve instead of shipping it south. Shipments from the northeast to the south shrank this year as more northeastern corn went into the reserve. At ports in southern China's Guangdong Province the price is 2300-2310 yuan/mt--kept relatively low by availability of imported substitutes. Prices are 2500 yuan or higher in Shanghai, Zhejiang, Hubei, Hunan, and as high as 2800 yuan in Yunnan.

Further west, high prices for corn and plunging prices for cotton stimulated a surge of western-China corn production. At a panel discussion held at this week's corn industry conference, a feed industry executive from Sichuan said feed mills there had stopped buying corn from the northeast this year, instead purchasing locally or shipping in corn from Xinjiang.

In his speech to the corn conference, the NDRC official suggested that China intends to move away from interfering with farm prices while experimenting with measures to regulate the flow of imports. Support for farmers will be decoupled from market prices by moving to "target price" subsidies once experience from pilot programs has been evaluated.

Instead, officials intend to shift their heavy-handed tinkering to imports. The NDRC official called for a "global vision" on food security which entails "coordinated" use of domestic and imported resources. He offered a number of vague principles for "managing" imports, making them more predictable and stable, diversifying imports, estimating the volume of imports needed for each commodity, stronger testing of imported commodities, "integrating" imports with reserves, and improving the registration and monitoring of imports.

China's Minister of Agriculture made similar comments in his recent discourse on sustainable agricultural development. The Minister said, "We don't oppose imports." Rather, he said, the key is to better regulate to flow of imports and exports to optimize the development of domestic production and domestic industries.

Tuesday, September 15, 2015

President Xi Jinping is trying to engineer an historic overhaul of China's rural economic and political system. He appears to be adopting approaches that echo the Mao era, which is ironic since Xi's challenge is to uproot deeply-entrenched institutions put in place by Mao himself.

Earlier this month, a "Xi Jinping San Nong Thought" seminar on rural affairs was held in Beijing in conjunction with the celebration of the 60-year anniversary of the "war to resist Japanese aggression." Xi was not there personally and the seminar had no connection to the war or the Japanese. A procession of reliable apparatchiks gave speeches explaining "Secretary Xi Jinping's" concern about agricultural and rural problems and his approach to addressing them.

Xi was not physically present at Minister of Agriculture Han Changfu's Q&A with unidentified journalists on September 14 either. But Xi's name was invoked five times by Minister Han in his discourse on China's new strategy to make agricultural and rural development sustainable. Initiatives to restructure agriculture, integrate agriculture with industry and services, provide rural financial services, attack rural poverty, and overhaul the agricultural market system all have Xi's fingerprints and represent a grand strategy to completely re-engineer China's agricultural and rural economy.

The title of the "Xi Jinping San Nong Thought" seminar, sponsored by the Peoples Daily official news media organization, is inscrutable to the uninitiated. "San nong" refers to three Chinese words sharing the character "nong"--agriculture, the countryside, and rural people. Exhortations to "study" (学习) Xi's "thought" (思想) appear to subtly link Xi to "Mao Zedong Thought" of the 1960s and '70s which is still recited by officials as the foundation for communist party dogma. However, Xi does not dare take on the title of "chairman"--officials
refer to him as "General Secretary" (of the communist party) or "Comrade."

Like Mao, Xi's "thought" is expressed by short, pithy couplets that are self-evident and are used as slogans or mantras to communicate official communist party dogma. The seminar kicked off by reminding officials that they can't neglect the countryside as they pursue shiny cities, airports, and trains. The first guiding thought is Xi Jinping's paen to the communist party doctrine of pursuing an "all-round well-off society" pronounced at a December 2013 meeting:

"If you want to know whether we're well-off or not, take a look at the countryside."

During an inspection tour of Jilin Province this year, Xi put his own spin on the "san nong" doctrine with his "three can nots":

"Agriculture cannot be ignored; we cannot forget farmers; we cannot be indifferent to the countryside."

Another set of couplets obliquely spell out Xi's emphases on nationalism, strong governance, the physical appearance of the countryside, as well as the importance of integrating the rural economy with the broader economy:

"For China to be strong, agriculture must be strong;
For China to be beautiful, the
countryside must be beautiful;
For China to be rich, the countryside must be
rich."

His exhortation to maintain basic food security is embodied by this mantra:

"The food bowl of the Chinese people must always remain firmly in their own hands."

All of these sayings of Comrade Xi were cited at the seminar on his "thought."

Authorities seem insecure that there are still pockets of severe poverty--mostly in the countryside--after years of rapid economic growth, and officials worry that big gaps between cities and countryside and coast versus interior could fragment the country and lead to disorder.

Xi's rural doctrine emphasizes knitting together the country by making it easier to rural people to enter cities, breaking down distinctions between rural and urban real estate markets, setting up multi-province "corridors" of development, and forming economic linkages between agriculture, industry, and services. Manifestations of this doctrine are ambitious strategies to reform the urban hukou system, a plan to overhaul the system of agricultural markets (the topic of Xi Jinping's doctoral thesis 15 years ago), and an initiative to boost links between farmers and agricultural processing.

Xi calls for following a road to agricultural modernization that includes "efficient industry, safe products, resource conservation, environmental protection and environmentally-friendly production"--aspects that fell by the wayside in the single-minded pursuit of breakneck growth over the past two decades. Finally, another emphasis is a "beautiful countryside" which includes cleaning up trash and upgrading toilets in villages.

The doctrine calls for upgrading competitiveness of farms and
businesses by increasing scale, using the latest technology (notably, "genetic modification" is identified as the first technology to pursue), with an
emphasis on information technology both for production and marketing.
The signature initiative is the push to create a new class of
commercial-scale farm operators and create supporting
infrastructure--banking and insurance services, technical advice, and a
new subsidy system.

The lead-off speaker at the Xi Jinping Thought seminar identified weak rural governance as a barrier to building a well-off society, said that many rural institutions lacked institutional design and legal rights are ill-defined.

A set of articles in Farmers Daily last week pointed out that incomplete land rights and inflexible banking institutions prevent successful integration of farmers with industry and services which are needed to ensure that income flows to rural areas.

Minister Han's discourse on sustainable development acknowledged that great improvements in production had been achieved at a high cost of environmental and resource degradation.

Fundamentally, Xi is attacking Mao-era institutions that are toxic to economic growth, outdated, and create disparities that threaten to undermine the Party's governance:

The urban-rural household registration system

collective rural land-ownership

taxation of agriculture to subsidize industry

provincial self-sufficiency

These 50-year-old institutions erected barriers to movement of people and goods that prevent establishment of a national, cohesive, self-sustaining economy. The countryside was the locus of economic growth during the 1980s when Deng Xiaoping used it as a giant laboratory to demonstrate the benefits of a market economy. During the 1990s, Jiang Zemin and Zhu Rongji concentrated on reforming state-owned industry and created a generation of urban real estate tycoons. Hu Jintao and Wen Jiabao addressed rural atrophy by eliminating taxes on peasants and starting to pour money in the "new socialist countryside." Now Xi is attacking the institutions that preserve fiefdoms and keep the economy reliant on the easy but unsustainable wealth created by building things and exporting goods to wealthy countries.

The Mao-era institutions created a spoils system that generates considerable wealth for officialdom through real estate deals and cronyism between local industry and officials. With the hukou system, city officials got an underclass of cheap labor but could dodge budgetary costs for schools, social insurance and housing since rural migrants were officially the responsibility of the rural county where they were registered. Just as Mao created a larger-than-life image while hammering opposition to put these institutions in place, Xi appears to be using a similar style to move aside entrenched interests and dismantle these growth-killing institutions.

Looking deeper, it appears that Xi's approach will replace one set of cronies with new ones. There is no coherent theory behind Xi's thought other than a vague, undefined exhortation to "reform." Xi wants to maintain and reform anachronistic institutions from the planned economy like COFCO, state farm entities, and supply and marketing cooperatives set up to serve communes during the 1950s, and make them models for the new economy. Many operators of the new-style farms and cooperatives are rural officials. There is no sign of permitting private banks in the countryside. The Xi Jinping seminar noted that the majority of communist party
branches are in the countryside and strict governance of the party is a
vital task. Private companies and tycoons are welcome as long as they finance the massive investment in fixed assets needed in the countryside as their "social responsibility."

A food processing company that buys soybeans in Heilongjiang Province told China Business Journal that it discovered GMO soybeans during 2013 and 2014 when it tested samples it had purchased in the province's Suihua prefecture. The company claims that GMO soybeans are widely grown in counties of that region.

No one knows where the seeds came from. One Heilongjiang field manager reports that seed from a trade show was surreptitiously sold. According to China Business Journal, Monsanto says they have never sold GMO seed in China. Other reports say that stealing and propagating seeds is commonplace in China. Chinese authorities have periodically reported intercepting seeds mailed into the country.

Some commentators speculate that the news is being spread by people who want to undermine China's ban on growing GMOs. Some cited Brazil as an example where an end to the ban on GMOs was similarly forced by widespread flouting of the ban by farmers. A farmer told China Business Journal, "We are all waiting for approval to plant GMO soybeans because everyone says they're much easier to grow."

China has tried to compartmentalize soybeans: domestic soybeans are supposed to be non-GMO, while imports of GMO soybeans are permitted after the variety is approved by Chinese officials. By this strategy, Chinese officials hoped to preserve China as a reservoir of non-GMO soybeans. This strategy is now under stress due to huge price gaps between domestic and foreign soybeans and related products.

Data source: China National Bureau of Statistics retail price data.

National Bureau of Statistics data illustrate the divergence in prices between the two main food products using soybeans as raw material. Since 2013, the price of tofu -- made from non-GMO domestic soybeans -- has marched steadily upward. Over that same period, the price of soybean oil used for stir-frying has tumbled along with prices on the global market (see chart).

An important product of soybeans is the meal left over after oil has been extracted from the beans, a key ingredient for animal feed. Soybean meal prices have been on a long slide as supplies outpaced tepid demand from the livestock sector hit with avian influenza, shrinking hog herds, and disruptions of fish-farming last year. Since 2013, the prices of both major products made from imported soybeans have fallen--soybean oil 22% and soybean meal by 18%. Meanwhile, tofu prices marched upward by a cumulative 12%.

Note: Prices converted to an index where January 2013=100.

Data source: China National Bureau of Statistics and Ministry of Agriculture.

There has been a related divergence in prices of soybeans used for the different products. On September 11, 2015, the average price paid for soybeans to be used for food products like tofu was 4300 yuan per metric ton in China's main soybean-producing region, while the price for soybeans for oil-processing there was 3850 yuan per metric ton.

Imported soybeans are even cheaper. On Sept. 11, the price for imported soybeans arriving at Chinese ports -- Guangzhou, Qingdao, and Tianjin -- was 3150 yuan per metric ton -- that's 700 yuan ($112) less than the price of Chinese soybeans used for the same purpose, and 1250 yuan less than the price of soybeans used for manufacturing tofu, soybean milk, soy sauce, etc.

The gap between domestic and global prices gradually brought about the bifurcation of China's soybean industry over the past decade. Processors facing sinking prices for cooking oil and meal are under strong pressure to cut costs by using cheaper imported soybeans. Processors making tofu and other food products are more insulated from imports, and they have paid a growing premium for domestic non-GMO soybeans.

The divergence of Chinese and global prices since 2013 has created such huge price gaps that holes are developing in the compartmentalization. The incentive to "cheat" by using cheaper GMO soybeans for purportedly non-GMO products has increased along with the 25-percent price gap. The incentive for farmers to grow GMO soybeans has also strengthened.

At the farm level, growing soybeans for oil and meal in China has become a mostly unviable business. Farmers are moving out of soybeans, producing food-grade beans at a premium, moving over the border to grow them in Russia, or looking for ways to cut costs and make a profit--such as growing herbicide-tolerant GMO soybeans that require less work to keep weeds down.

Economics may also undermine China's similar strategy to cordon off its wheat and rice sectors for food security purposes. Authorities have indicated that they intend to continue supporting prices of those crops given their importance as staple foods.

Wheat and rice prices have followed a steady-upward climb similar to that for tofu. As Chinese officials pull the props out from under prices of other commodities, similar imbalances will manifest. For example, rapeseed production is plunging as its price falls and farmers shift to wheat which still has a support price.

Data source: China National Bureau of Statistics retail prices.

The bottom line is that a large country cannot successfully compartmentalize certain segments of its economy to open some to foreign trade while sheltering others from the global market. Leaks develop and officials must take ever-more complex measures to plug them. Chinese leaders tried to use soybeans as a single release valve for its excess demand for farm commodities while insulating domestic producers from the world. Now the flow through the release valve is too strong to control and cracks in the dike are forming.

Wednesday, September 9, 2015

As China's fall harvest arrives, there is strong downward pressure on farm commodity prices. Downward pressure in international markets and weak demand in China are driving prices down as attempts to wall off the Chinese market from the world are crumbling.

News reports say the government is deliberating on how much to cut this year's support price for corn from last year's prices of 2220-2260 yuan/metric ton in northeastern provinces. However, early-harvested spring corn from Shaanxi and Xinjiang is already selling below 2000 yuan/mt. Prices are at or below 2000 yuan in in north China (Henan and Hebei) where some private warehouses are selling off their old corn from inventories to clear out space for the new crop--and perhaps they also anticipate a slide in prices. Chinese futures prices for January corn are trading even lower--well below 1950 yuan.

In the final week of August, there was tepid interest in corn auctioned from Inner Mongolia reserves offered at 2350 yuan/mt. As market prices fall, interest in buying the government's expensive corn inventories wanes.

The temporary reserve program for corn operates only in the northeastern provinces (Liaoning, Jilin, Heilongjiang, Inner Mongolia). With expectations that the temporary reserve program will prop up prices in that region as prices fall elsewhere, corn processors in the northeast are at a disadvantage and have idled production lines. High prices from the northeast also attract shipments of corn from north China to arbitrage the artificial price difference.

China's wheat market is also under downward pressure. There were virtually no sales from the latest auctions of wheat reserves. Now, even the price of relatively scarce high-quality wheat is falling due to weak demand. Medium and small flour mills are operating at about 30% of capacity. According to Futures Daily, wheat traders in Henan Province say they have not been paid for quality wheat they sold to mills this summer.

Others in the industry say that there is still an insufficient supply of quality wheat in the domestic market. There is reportedly strong demand for imported wheat that has recently arrived at Chinese ports.

Thursday, September 3, 2015

China has subsidized creation of the world's largest cotton patch in its arid northwestern Xinjiang territory. China is the world's second-largest cotton producer, and 60% of its output came from Xinjiang in 2014 (one source says the share is 70% in 2015). Hundreds of thousands of laborers have to be brought in from other provinces to pick the cotton. And, with virtually no textile industry nearby--the government is also subsidizing the creation of a Xinjiang textile industry to process the cotton.

A survey by the Xinjiang Academy of Agricultural Sciences reported last month that farmers there received an average of 444 yuan per mu (about US$ 435 per acre) in subsidies from the trial "target price" subsidy program that began in the 2014/15 marketing year. The subsidy was enough to give the Xinjiang cotton farmers a profit of 235.8 yuan per mu. Without the subsidy, farmers would have lost 208.56 yuan per mu.

Propaganda photo shows Xinjiang man getting cotton subsidy.

The survey reported that the average cotton price received was 5.5 yuan/kg for seed cotton, and gross receipts were 1962.6 yuan per mu. Based on these figures, the 444-yuan subsidy equaled 22.6 percent of the value of production in Xinjiang. (That far exceeds China's WTO-imposed limit that subsidies can be no more than 8.5 percent of the value of output.)

An April report in International Commerce News said that the subsidy could be as much as 700 yuan per mu in parts of Xinjiang with high yields and good quality cotton. The report emphasized that subsidies were designed to ensure that payments went to actual producers of cotton and that they increased incentives to produce greater volume and improved quality of cotton. China's cotton subsidies for 2014/15 vary by locality and are calculated either per unit of land or with a combination of land and quantity.

Compared with Xinjiang's, the cotton subsidies are lower in other parts of China but higher than grain subsidies (which are roughly 60-to-100 yuan per mu). There is not much information on these subsidies, but here are some examples discovered on the Internet:

With lower subsidies and high labor requirements, cotton production is plummeting outside of Xinjiang.

While the subsidies seem generous, fewer farmers are growing cotton, even in Xinjiang. The Xinjiang Production Corps said it reduced its cotton area by 12.9% this
year, mostly due to removal of 1 million mu of low-yielding arid land from production, but
availability and cost of labor also played a role. A survey conducted in southern Xinjiang during August reported that 2015 cotton area declined by 8%-to-20% in several counties that were visited. The Xinjiang Academy of Agricultural Sciences report said the Xinjiang region's cotton area declined 4 million mu (267,000 hectares) in 2015.

Cotton is a labor-intensive crop, and that's a problem in a country where wages are rising rapidly. Despite having made a lot of progress in mechanizing production, a report on the sprawling Xinjiang Production Corps says the need to import vast numbers of laborers to pick cotton is a continuing "headache." Since 2003, Xinjiang has been importing hundreds of thousands of laborers from other provinces each year to help with the cotton crop but now it's harder to get laborers. The number peaked at 600,000 in 2008. In 2015, reports say that Xinjiang will only be able to hire 142,900 migrant workers for the cotton crop, only a fraction of the 288,700 that are needed. The number of workers was reportedly down 64,000 from last year. The cost for each worker is a little over US$ 1000.

Another objective of officials is to "create a complete cotton industry chain" in Xinjiang. China's textile industry is concentrated in coastal provinces--Shandong, Jiangsu, Zhejiang--thousands of miles from Xinjiang--so the cotton requires further subsidies to transport it across the country. Xinjiang is expected to process 600,000 metric tons of the 3.5 million metric tons it produces this year. The region only has 216,000 metric tons of "above scale" yarn processing capacity this year but that's up 18.6% from last year.

According to the survey in southern Xinjiang last month, textile mills reportedly get a subsidy of 3000 yuan per metric ton processed. A new industrial park in Korla City started with 880,000 spindles, expects to have 5 million by the end of the year, and 10 million in five years. Xinjiang has a textile industry plan referred to as "Three cities, seven (industrial) parks, one center," that also features creation of brands, science and technology, and management innovation.

The new "target price" subsidy pays farmers based on the gap between the market price and a target set by the government when the market price is less than the target level. This replaces the "temporary reserve" support price that held Chinese prices far above world prices during 2011-13. The "target price" is said to be more market-oriented, decouples support from farmers from the price, and restores competitiveness of the Chinese textile industry by allowing the price processors pay for raw materials to fall in line with global prices.

The "target price" is supposed to be a model for the new direction in Chinese farm subsidies, yet it was implemented in a slapdash and secretive manner. At a meeting on farm support policies for Chinese agricultural officials several months ago, Vice Minister Chen Xiaohua's speech said, "Overall the situation is good and the price formation system has become more market-oriented," but he also acknowledged that "the reform is still in its exploratory stages and there are some problems. He insisted, "This policy is the future direction of reform, and we can't turn back due to temporary difficulties."

There has been virtually nothing revealed about the operation of this high-profile subsidy experiment. At the May meeting, Vice Minister Chen's speech revealed that the first year met with a number of problems. A Ministry of Agriculture evaluation of the target price policy released in July 2015 summarized the problems and promised improvements in the target price program's second year.

According to the Ministry's report, details about the program were announced late, and publicity was poor. The program's complexity and data requirements demanded a great deal of effort from local officials to verify how much cotton was planted by each subsidy recipient. According to the Xinjiang Academy of Agricultural Sciences survey,
Xinjiang has 2.5 million cotton farmers with holdings averaging 12 mu
(less than 2 acres) and only 46,000 farms planted 50 or more mu of
cotton. The Ministry's report says some farmers collected subsidies although they illegally planted cotton on environmentally-fragile land; other farmers entitled to subsidies didn't get them. There was false reporting of land and falsified warehouse receipts, and subsidy funds arrived later than expected, according to the report. Responsibilities were not clearly defined for various departments and levels of officials, and some tasks fell through the cracks. A single subsidy standard for the whole region was deemed inappropriate in view of the diverse growing conditions and yields. Farmers in some regions reportedly couldn't cover their costs, even with the subsidy.

The market price for cotton seems to have dropped further than officials anticipated. The Ministry's assessment report says the farm price dropped to 6 yuan/kg from as high as 9 yuan/kg in previous years. Xinjiang surveys report that the price was in the range of 5 to 5.5 yuan/kg and farmers say they were not satisfied with the price. The price offered by processors was reportedly lower than farmers were willing to accept. The Xinjiang Production Corps claims to still have substantial volumes of cotton from the 2014 crop that it has not been able to sell. Processors in Xinjiang reportedly lost money during 2014/15 as the price fell over the course of the season and will be cautious in purchasing this year.

Chinese cotton prices have fallen 30% since the end of the temporary reserve program in 2014. The Ministry of Agriculture's July 2015 situation and outlook report says that the price for Grade B 3128 cotton fell 23.5 percent from a year ago. The price on the Zhengzhou cotton exchange was down 26.8% from July 2014.

This year, the target price subsidy program will be tweaked to give farmers stronger production incentives and simplify procedures. Last year, the subsidy amount was based 60% on planted area and 40% on sales. This year, it will be "based mainly on production." Ten percent of subsidy funds will be set aside to give extra subsidies for four prefectures in southern Xinjiang. They plan to cut back on administrative overhead in the program: in 2014, Xinjiang's cotton subsidy was paid out in four installments; this year it will be cut to two. This year, the Xinjiang Production Corps is setting up a database to track planted area, cotton sales, test results, processing and subsidies.

Why would China spend huge amounts to build a high-cost cotton industry thousands of miles from most of the consumer market? One reason is the anachronistic carryover of the obsession with cotton-textiles which used to be one of China's main industries during the last century. Another is to buy stability in the restive Xinjiang region. The cotton subsidies also support another anachronism--the Production Corps, an archipelago of Han Chinese settlements set up 50 years ago to solidify control over the colony territory. Finally, the Ministry of Agriculture describes Xinjiang as a core strategic region for the "One Belt, One Road" initiative to link up China with Central Asia and beyond.